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  • Addendums to Section 1 Basis of Investing the Rights of the Participants – Takaful

    • Addendum (1)

      1. The investment portfolio shall consider the type of business carried out by the Company, in particular the nature, amount and duration of expected claim payments, in such a way as to secure the sufficiency, liquidity, security, quality, profitability and matching of its assets .
         
      2. With respect to the whole portfolio of assets, Takaful operators shall only invest in assets and instruments whose risks can be properly identified, measured, monitored, managed, controlled and reported thereof, and appropriately take into account in the assessment of its overall solvency needs as detailed in the Solvency Margin and Minimum Guarantee Fund regulations.
         
      3. All assets, in particular those covering the Minimum Capital Requirement, Solvency Capital Requirement and Minimum Guarantee Fund, shall be invested in such a manner as to ensure the security, quality, liquidity and profitability of the portfolio as a whole. In addition the localization of those assets shall be as such to ensure their availability.
         
      4. Assets held to cover the technical provisions shall also be invested in a manner appropriate to the nature and duration of the Takaful and Re-Takaful liabilities. Those assets shall be invested in the best interest of all participants and beneficiaries taking into account any disclosed policy objective.
         
      5. Wherever possible, the Company must use ‘mark-to-market’ to measure the value of the investments.

        a) When using ‘mark-to-market’, the Company must use the more prudent side of bid/offer unless the Company is a significant market maker in a particular position type and it can close out at the mid-market price.

        b) When calculating the current exposure value of a credit risk or exposure for counterparty credit risk purposes:
         
        1. 1) The Company must use the more prudent side of bid/offer or the mid-market price and the Company must be consistent in applying the basis it chooses; and

        2. 2) If the difference between the more prudent side of bid/offer and the mid-market price is material, the Company must consider making adjustments or establishing reserves.
           
      6. When ‘mark-to-market’ is not possible, the Company must use ‘mark to model’ to measure the value of the investments. Marking to model is any valuation which has to be benchmarked, extrapolated or otherwise calculated from a market input as follows:

        a) When the model used is developed by the Company, that model must be:
         
        1. 1) Based on appropriate assumptions which have been assessed and challenged by suitably qualified parties independent of the development process;

        2. 2) Independently tested, including validation of the mathematics, assumptions, and software implementation;
           
        3. 3) Independently certified by an Actuary; and
           
        4. 4) Developed or approved independently by the Investment Committee.
           
        b) The Company’s senior management must ensure that the Investment Committee, or its equivalent in the governance structure of Foreign Takaful operators, is aware of the positions which are subject to the ‘mark-to-model’ valuation and understand the materiality of the uncertainty this creates in the reporting of the performance of the business of the Company and the risks to which it is subject.

        c) The Company must source market inputs in line with market prices as far as possible and assess the appropriateness of the market inputs for the position being valued and the parameters of the model on a frequent basis.

        d) The Company must use generally accepted valuation methodologies for particular products where these are available.

        e) The Company must establish formal change control procedures, hold a secure copy of the model, and periodically use that model to check valuations.

        f) The Company must ensure that its risk management function personnel are aware of the weaknesses of the models used and how best to reflect those in the valuation output.

        g) The Company must periodically review the model to determine the accuracy of its performance. Examples of periodic review include assessing the continued appropriateness of the assumptions, analysis of profit and loss versus risk factors and comparison of actual close out values to model outputs.

        h) The market valuation of the investment in real estate shall be performed as follows for the calculation of Admissible Assets:
         
        1. 1) One independent real estate firm shall perform the revaluation of the investment in real estate for investments worth less than AED 30 million.

        2. 2) Two independent real estate firms shall perform the revaluation of the investment in real estate for investment worth more than AED 30 million; the average of both valuations will be accounted for. If needed a third firm could be employed to perform the valuation in case the difference between the first two firms was more than 20% of the lowest valuation. Accordingly, the valuation will be calculated based on the average of the two firms negating the valuation with the largest of the three excluded.

        3. 3) The independent real estate firms should be a technical expert for valuation of investment in real estate.
           
        4. 4) The valuation of the real estate shall be performed by the Company at least annually or as required by the Authority.

        5. 5) The same independent real estate firm shall not be appointed for two consecutive periods to perform the valuation of the same estate. This restriction doesn’t apply to the government-based Land Department.

        6. 6) For real estate valuation purposes, the Company shall hire real estate firms accredited by at least two banks operating in the State or real estate experts licensed for this matter or the government-based Land Department.

        i) The discounted cash flow valuation of the investment in real estate shall be performed as follows for the purpose of calculating the Solvency Margin requirements:
         
        1. 1) Estimate the value of annual rental income over the expected life of the property, not to exceed thirty (30) years.
           
        2. 2) The total rental income per year shall be reduced to account for a reasonable vacancy rate for similar properties.
           
        3. 3) The total rental income per year shall not be increased in future years for inflation.
           
        4. 4) The annual rental income shall be discounted at the current risk free rate to determine the total cash flow valuation.

    • Addendum (2)

      1. The policy on overall investment strategy shall cover, at least, the following elements:

        a) The investment objectives, both at Company and fund-specific levels;

        b) The risk and liability profiles of the Company;

        c) The strategic asset allocation, i.e., the long-term asset mix for the main investment categories, and their respective limits;

        d) The extent to which the holding of certain types of assets is restricted or disallowed, such as illiquid or highly volatile assets; and

        e) An overall policy on the usage of derivatives and structured products.
         
      2. The Company should have in place a Board of Directors (BOD) level Investment Committee. The Investment Committee should have its own charter, investment policy and guidelines approved by the BOD. The Investment Committee can act as a management committee with members of the Investment Committee being elected by the Board of Directors. Members can be executive directors, executive management or members of any of the committees established by the Board of Directors. At a minimum, the Investment Committee shall be responsible for:

        a) Establishing the investment strategy and policy for approval by the Board of Directors;

        b) Setting the investment guidelines;

        c) Reviewing / monitoring the investments;

        d) In conjunction with the Audit Committee, determining the scope of the rigorous audit procedures that include full coverage of the investment activities to ensure timely identification of internal control weaknesses and operating system deficiencies; and

        e) Assisting the Board of Directors in its evaluation of the adequacy and efficiency of the investment policies, procedures, practices and controls applied in the day-to-day management of its business through an audit report (either independent internal or external) that is to be submitted to the Audit Committee.
         
      3. Senior management is responsible for managing and reviewing the investment policies of the Company and reporting the same to the Investment Committee and Shari’a Committee. The function of senior management with the responsibility of executing the investment policy is to:

        a) Manage and review the investment policies of the Company and reporting the same to the Investment Committee;

        b) Ensure proper implementation of investment policies, procedures, practices and controls approved by the Investment Committee are applied in the day-to-day management of its business in accordance with the established levels of risk appetite;

        c) Provide timely and regular reporting to the Investment Committee of the Company’s investment activities;

        d) Establish adequate internal controls to ensure that assets are managed in accordance with approved investment policies, and in compliance with legal, accounting and relevant risk management requirements. These controls shall ensure that investment procedures are documented and subject to effective oversight; and

        e) Ensure adequate segregation of duties between execution, recording, authorization, reconciliation and related assurance activities.
         
      4. The Company shall establish adequate internal controls to ensure that assets are managed in accordance with approved investment policies, and in compliance with legal, accounting and relevant risk management requirements. These controls shall ensure that investment procedures are documented and subject to effective oversight. There shall be in place adequate segregation of duties between execution, recording, authorization, reconciliation and related assurance.
         
      5. The Company shall have in place audit procedures that include full coverage of the investment activities to ensure timely identification of internal control weaknesses and operating system deficiencies. If the audit is performed internally, it shall be independent and shall report to the Audit Committee, or its equivalent in the governance structure of Foreign Takaful operators.
         
      6. The Company shall consider the following, along with the supporting policies, procedures and infrastructure, when adopting internal controls:

        a) Identification of personnel who are responsible and accountable for all transactions involving sales and purchase of assets;

        b) Observations of restrictions on the empowerment of all parties to enter into any particular transaction. This will require close and regular communication with those responsible for compliance, legal and documentation issues in the Company;

        c) Agreement from all parties of a given transaction with the terms of the deal. Procedures for sending, receiving and matching confirmations shall be independent from the issuance and marketing functions of the Takaful insurance policies;

        d) Formal documentation is completed promptly;

        e) Positions are properly settled and reported, and any late payments or late receipts are identified;

        f) All transactions are carried out in conformity with prevailing market terms and conditions;

        g) Authority limits are strictly enforced and all breaches are reported and remedial actions are taken promptly;

        h) Independent checking of rates or prices and choice of rates shall not solely rely on dealers for rate/price information;

        i) Set out the process for recommending, approving, and implementing decisions; and

        j) Prescribe the frequency and format of reporting to relevant internal and external authorities.
         
      7. Appropriate procedures shall be in place to enable the Company to monitor the interaction of its assets and liabilities to ensure that exposure to asset classes is contained within limits approved by the Company. The Company must define the exposure limits. The Company must ensure that the exposure limits are within the limits defined in paragraph (1) of Article (3). Procedures shall include testing of sensitivity to realistic scenarios that are relevant to the circumstances of the Company.
         
      8. Appropriate procedures shall be in place to enable the Company to monitor the location of its assets and liabilities, so as to ensure that risk of localization mismatch is contained within limits approved by the Company. Procedures shall include testing of sensitivity to realistic scenarios, including political risk scenarios that are relevant to the circumstances of the Company.
         
      9. The Company shall consider asset and liability risks on an integrated basis. Systems shall not consider only risks taken in isolation, but shall consider how even when individual risks are addressed, combinations of circumstances may still expose the Company to loss. This is of particular relevance where a single outcome is exposed to more than one risk.
         
      10. In terms of Shari'a governance on investment, the Company shall put in place appropriate procedures to ensure investment portfolios are Shari'a-compliant including the process required in respect of returns from tainted / non-halal income. The roles of the Company Shari'a Committee shall be clearly spelled out to ensure the effectiveness of the Shari'a governance.

    • Addendum (3)

      1. Liquidity Risk

        a) The Company shall have access to sufficient liquidity to meet all cash outflow commitments to participants (and other creditors) as and when they fall due.

        b) The risk management system for liquidity risk will normally include at least the following:
         
        1. 1) Procedures to identify and control the level of mismatch between expected asset and liability cash flows under normal and stressed operating conditions (using realistic scenarios relevant to the circumstances of the Company);

        2. 2) Procedures to monitor the liquidity of assets;

        3. 3) Procedures to identify and monitor commitments to meet liabilities including Takaful liabilities;

        4. 4) Procedures to monitor the uncertainty of incidence, timing and magnitude of Takaful liabilities;

        5. 5) Procedures to identify and monitor the level of liquid assets held by the Company; and

        6. 6) Procedures to identify and monitor other sources of funding including Re-Takaful, borrowing capacity, lines of credit and the availability of intra-group funding, and to identify the need for such sources to be made available.

        c) When assessing its liquidity requirements the Company shall also consider the currency in which the assets and liabilities are denominated, and the locations in which those assets and liabilities are situated or payable.

        d) For the purposes of determining the adequacy of its overall financial resources, the Company must carry out appropriate stress testing and scenario analysis, including taking reasonable steps to identify an appropriate range of realistic adverse circumstances and events in which liquidity risk might occur or crystallize.

        e) The choice of scenarios that the Company uses will depend on the nature of its activities. For the purposes of testing liquidity risk, however, the Company shall normally consider scenarios based on varying degrees of stress and both Company-specific and market-wide difficulties.

        f) The Company shall review frequently the assumptions used in stress testing scenarios to gain assurance that they continue to be relevant.
         
      2. Credit Risk
        The Company faces Credit risk whenever it is exposed to loss if another party fails to perform its financial obligations to the Company, including failing to perform them in a timely manner. This also includes the impact on investments of credit rating downgrades and widening of credit spreads. Credit exposures can increase the risk profile of a Company and adversely affect financial viability. Credit exposure includes both on-balance sheet and off-balance sheet exposures (including guarantees, derivative financial instruments and performance related obligations) to single and related counterparties.

        The risk management system for credit risk will normally include at least the following:

        a) Credit Risk Limits (at the minimum as defined in Article (3) for credit exposures to:
         
        1. 1) Single counterparties and groups of related counterparties;

        2. 2) Entities to which the Company is related;

        3. 3) Single industries; and

        4. 4) Single geographic locations.

        b) Processes to monitor and control credit exposures against pre-approved limits.

        c) Processes for identifying breaches of limits and for ensuring that breaches of limits are brought within the pre-approved limits within a set timeframe.

        d) Processes for reducing or cancelling limits to a particular counterparty where the counterparty is known to be experiencing problems.

        e) Processes for approving requests for temporary increases in limits.

        f) Processes to review credit risk exposures (at least annually but more frequently in cases where there is evidence of deterioration in credit quality).

        g) A management information system that is capable of aggregating exposures to any one counterparty (or group of Related counterparties), asset class, industry or region in a timely manner.

        h) A process for reporting to the Board of Directors and senior management.
         
        1. 1) Significant breaches of limits; and

        2. 2) Large exposures and other credit risk concentrations.
         
      3. Market Risk

        a) Market risk includes equity risk, foreign exchange (FX) risk, commodity risk and yield rate risk.

        b) The risk management system for market risk will normally include at least the following:
         
        1. 1) Procedures to document its policy for market risk, including its risk appetite and how it identifies, measures, monitors and controls that risk;

        2. 2) Procedures to document its asset and liability recognition policy. Documentation shall describe the systems and controls that it intends to use to comply with the policy; and

        3. 3) Procedures to establish and maintain risk management systems to identify, measure, monitor and control market risk (in accordance with its market risk policy), and to take reasonable steps to establish systems adequate for that purpose.

    • Addendum (4)

      1. Investment in derivatives must contribute to a reduction of investment risks or facilitate efficient portfolio management and such investments must be valued on a prudent basis, taking into account the underlying assets, and included in the valuation of the Company's assets. Investments in derivatives should be restricted to hedging purposes only.
         
      2. The Company must avoid excessive risk exposure to a single counterparty and to other derivative operations.
         
      3. Prior to undertaking any derivative transactions, the Board of Directors of the Company is expected to ensure that:

        a) It understands the scope and nature of derivative activities to be undertaken;

        b) The derivative transactions are consistent with the investment and risk management policies of the Company;

        c) Approved policies, systems and procedures that are commensurate with the level and nature of derivative activities to be undertaken by the Company are in place and have been clearly communicated to all levels of staff concerned; and

        d) The Company has appropriate resources (e.g., competent, capable and qualified personnel), capacity and adequate infrastructure to effectively manage and monitor derivative positions.
         
      4. The Company shall ensure that controls over derivatives and other investment instruments have been implemented and are adequate to ensure that risks are properly assessed, regularly reviewed in the light of changing market conditions and experience, and consistent with the overall investment strategy decided upon and approved by the Company.
         
      5. The senior management of the Company shall put in place a written risk management policy, approved by the Board of Directors. In respect of derivative activities, the risk management policy shall cover the following primary components of risk management practices:

        a) The purpose for which derivatives may be used;

        b) The scope and types of permitted derivatives, including the risk tolerance level in respect of its derivative activities;

        c) Procedures for the proper authorization of any change in significant risk management policies or procedures;

        d) Procedures on authorization of new derivative products for use by the Company;

        e) Restrictions on counterparties with whom derivative transactions may be executed;

        f) Details on persons authorized to enter into derivative transactions and limits of authority;

        g) Clear lines of responsibility for the monitoring and management of the Company’s derivative positions;

        h) Procedures for regular reporting to senior management and the Board of Directors on derivative activities; and

        i) A provision for periodic review by the Board of Directors and senior management of the Company’s risk management policy to gauge its effectiveness in managing risk exposures and to ensure that the policy remains consistent with the Company’s corporate strategies and financial and management capabilities, particularly in the light of changing circumstances.

    • Addendum (5)

      1. The Company must establish comprehensive policies and procedures to govern the strategic investment policy of any outsourced Takaful funds, establish an effective risk management system to monitor and continuously assess material risks, and for the Takaful funds to be segregated and not co-mingled with other funds managed by the outsourced entity. The Company must regularly monitor the performance of the outsourced entity, at least quarterly, and take appropriate actions if the investment performance of the outsourced entity would adversely affect the investment returns to participants or their reasonable expectations cannot be achieved.
         
      2. For this purpose, the Company must ensure that adequate expertise and resources are retained in-house to support the monitoring function of the outsourced entity. The Company must ensure that, under the terms of the contract, they regularly receive sufficient information to evaluate the compliance of the outsourced entity with the investment mandate. The Board of Directors of the Company shall continue to be accountable to manage the risks arising from the outsourcing arrangements. The Company shall also remain responsible for the fiduciary duty and professional aspects of the outsourced activity.